It's one of those interesting quirks of fate that the peak of the yellow jacket protests in France should coincide with the virtual scrapping of the proposal to tax the sales revenue produced by web giants (so called GAFAs) by 3%, (as an additional form of VAT) in Europe . The coincidence is striking because France is the country that has done its utmost to get the proposal accepted, yet at the same time it is absurdly trying to introduce national policies that go in entirely the opposite direction. Let's try and understand what the whole matter is about and what possible solutions can be found to a problem that goes well beyond our European borders.

In a world where the obstacles to the free movement of capitals are being constantly removed, so called "fiscal optimisation", by which we refer to the transfer of profits of multinational companies to countries where the taxman is less demanding, has reached very considerable proportions, to the extent that it has drastically altered our understanding of economic policy. A recent study by Thomas Tørsløv, Ludvig Wier and Gabriel Zucman has estimated that over 600 billion dollars' worth of profits were moved to tax havens in 2015, which account for almost 40% of profits made by multinationals in that year. Clearly this is a game where multinational companies rule the roost, as by their very nature they transfer resources (costs and revenue) beyond national borders and can therefore are ideally set up to engage in fiscal optimisation. And among these multinational the ones that stand out are those that specialise in providing services linked to IT technologies, such as the GAFA companies, which by definition have few tangible assets.

The top destinations of these revenues are countries such as Ireland (which on its own accounts for over 100 billion), Singapore and the Netherlands. The companies transfer their tax base by setting up their business where taxation is more favourable, or simply by "allocating" the profits of their conglomerates to the branch in that particular country. In both cases, the country in question has clear advantages. In the first instance, because the business activities bring with them investments, employment and linked business activities. Secondly, because even if the profit transfer doesn't lead to an actual increase in business activity, the country will in any case see its own tax revenue increase and will thus be able to fund its public policies. That's why, with very few exceptions, most emerging and advanced countries are vying to engage in fiscal dumping. The most startling development in fiscal policies around the world over the last decades is the decline in tax rates imposed on corporate profits. Between 1985 and 2018, the average corporate tax rate has dropped by half, from 49% to 24%. The race to secure the mobile factors (the capital, but also the wealthiest people, usually very mobile and adept at slipping through tax loopholes), has led governments to reduce public services, while at the same time increasing the fiscal burden on non-mobile factors and unqualified labour.

Tax competition, in other words, is one of the motors that is bolstering the inequality that is whittling away at the model of society typical of European countries. It's symptomatic, to get back to the yellow jacket protests, that after increasing the tax burden on the middle classes year after year, today the French government is asking that same middle class to contribute to the ecological transition while taxation of higher incomes is essentially dropping and public and social services (which for the most part benefit middling to lower incomes) are being cut back.

Moreover, it's worth noting that while this state of affairs is much the same everywhere, and is linked to the increasing ease with which capital and qualified labour can relocate in a globalised economy, in Europe things are worse because in recent decades its management sector has bought into the idea that market efficiency is the driving force behind growth (which has spawned the obsessive insistence with the need for structural reform of public policies), and thus promoted a reduction of the state's prerogatives as a pre-requisite for the attainment of that same level of efficiency.

Economic theory clearly demonstrates that in a system that displays strong economic integration (as does the EU), centralised taxation is an improvement, in terms of collective wellbeing, over the decentralised version (i.e. state taxation in Europe). By the same token one can easily demonstrate that when economic integration increases, the states tend to increase taxation on fixed assets (employment, consumption) in a way that is by no means ideal.

A solution, dear to the sovereigntists of all political persuasions, would be to reduce integration, or to "halt globalisation", in order to recover the state's capacity to implement its own tax policies. However, besides the objective difficulty in severing the bonds that link each economic system to the world's economy (the Brexit tragicomedy provides the best example), turning one's back on economic integration is the same as throwing the baby out with the bathwater. Cutting oneself off from global finance and production lines will only reduce the collective wellbeing of any country making such an unwise choice.

So what are we going to do about it? Beyond its symbolic value, the GAFA taxation project was probably a weak and badly thought out measure. While the idea of using sales as the tax base would have stopped profits taking flight to safer shores, the measure introduces a distortion in the system that is detrimental to domestic companies that essentially produce revenue in Europe, to the advantage of global multinational corporations (the main target of the measure) that can 'spread' the greater tax levy on all the group's business activities (the exemption for smaller companies, foreseen by the project, would limit but not solve the problem). What's more, particularly for domestic companies, it introduced the problem of double taxation: on sales and then on profits. This was likely to violate the principle of tax fairness which is one of the mainstays of the equity of tax systems.

The solution to the problem must necessarily be more radical. For a few years now EU countries have been presented with a proposal by the Commission that would lead to the creation of the Common Consolidated Corporate Tax Base, also known as the CCCTB. The idea is both simple and radical at the same time: in this scheme the profits of all the branches of multinational corporations would be consolidated, and allocated in their entirety to the one country where the corporation has its main offices. This taxable income would then be redistributed among the countries that host the branches according to a formula that would take into account the geographic distribution of the capital, the employees and the company's sales volumes. In the most radical version, the corporate tax would be harmonised; but one can easily imagine that, at least in the early stages, once the taxable base for the various countries had been established, each of them could retain control over their own tax system. What's worth noting here is that a single tax rate would make it much easier to assign a share of the tax revenue to funding Europe's centralised tax capacity that has been at the centre of so many discussions in recent months.

As with many of its proposals, especially those that seem to edge towards a more federal arrangement, the Commission has a hard time even opening a platform for CCCTB discussions; the countries that benefit from fiscal competition are drastically opposed to any such measure. In an EU where national interests are increasingly and short-sightedly winning out against shared ones, any solution that contemplates more 'federal' power is in trouble. But everything, from economic theory to the major economic trends, seems to indicate that this choice cannot be put off any longer. If we want to try and salvage the EU countries' welfare system and the capacity to fund it, the fiscal dumping mechanism has to be reversed, as it is endangering our entire social organisation. Europe must adopt a centralised tax system in line with the indications provided above, and that can ultimately ensure that capital and major multinational corporations contribute to the social and economic progress of our societies.